Reference no: EM132685971

Problem 1: Your daughter will start college one year from today, at which time the first tuition payment of $58,000 must be made. Assuming that tuition does not increase over time and that your daughter remains in school for four years, how much money do you need today in your savings account, earning 5% per annum, in order to make the tuition payments over the next four years?

Option 1: 290,000

Option 2: 1,657,142.85

Option 3: 70,499.36

Option 4: 205,665.13

Problem 2: Imagine that the government decided to fund its current deficit of $431 billion dollars by issuing a perpetuity offering a 4% annual return. How much would the government have to pay bondholders each year in perpetuity?

(Hint: The $431 billion is just the present value of these cash flows at a discount rate of 4%.)

Option 1: 17.24 Billion Dollars

Option 2: 448.24 Billion Dollars

Option 3: 10.78 Billion Dollars

Option 4: 107.75 Billion Dollars